Medspa ownership is complicated, even if you’re familiar with the medical aesthetic industry. What is an MSO? How does it connect to the Corporate Practice of Medicine? We wrote this article for practice owners, practitioners, industry executives, and advisors looking to familiarize themselves with the background, features, functions and risks of affiliating with MSOs.
Whether considering an MSO as a means to scale or merely as competition, we will cover the basics of the MSO model in the context of the CPOM Doctrine. In this article, we will answer some critical questions, including defining both MSOs and CPOM and what they mean for medspa owners.
What are MSOs and how did they come about?
MSO stands for Management Services Organization. Medspas leveraging an MSO model are essentially operating two separate businesses. The medical clinic handles all things medical–like treating patients and operating medical equipment. The MSO, technically a management company, handles all of the business operations: staffing, payroll, accounting, marketing, and more. The two entities use an MSA (management services agreement) to define the operational arrangements and flow of funds between the medical clinic and MSO.
The MSO model has been used for decades as a means of allowing unlicensed or underlicensed individuals (non-physician providers like RNs, NPs, PAs) and investors to take a quasi- ownership role in healthcare practices.
MSOs came about in the face of Corporate Practice of Medicine (CPOM) prohibitions. (Don’t worry, we’ll get to CPOM later in this article). However, it was not until recently that the medical aesthetics industry began seeing a massive influx of MSOs into the space. MSOs are attractive to private equity groups. First, they create a way for investors to take an ownership stake in the lucrative medical aesthetics industry. In addition, MSOs can be a platform for scaling, expanding, and adding value to a medical spa because they centralize operations and create efficiencies.
Of course, like every business model, MSOs have both benefits and drawbacks. We’ll explore those in the next section.
The pros and cons of selling to or affiliating with an MSO as a healthcare provider
Owning a medical spa requires much more than giving injections or operating a laser. Medical providers passionate about the art of patient care might see a lot of benefit in passing off administrative duties like payroll to another company.
Here are the benefits of an MSO model:
An MSO allows non-physicians to take an active role in the operation of a medical spa in any state.
MSOs can centralize business operations and create efficiencies for owners looking to open multiple locations. (Consider a centralized business handling payroll, marketing, and even reception via a call center for a handful of medical spa locations.)
MSOs are attractive to private equity (PE) groups.
Many PE-backed MSOs offer some equity to owners, which could lead to a second payday when a company sells down the road.
Some providers will have no choice but to create an MSO from the beginning in order to own a medical spa–like a PA hoping to start a business in a state that only allows physicians to own medical spas. While other medspa owners may choose to affiliate with an MSO or sell to one after their business is established.
If that’s the case for you, consider the risks of selling to or affiliating with an MSO:
Affiliating with an MSO will require changes to operations, flow of funds, and even personnel. It’s important to consider whether or not you’re open to changing the way you operate.
A doctor/owner selling her practice to an MSO now becomes an employee of that organization. Sellers, usually entrepreneurs, must consider whether or not they’re ready to give up some control of the business they’ve built from the ground up.
Choosing the right partner is essential. Both sides (the MSO and clinic) should carefully vet the arrangement and craft a mutually agreed-upon MSA.
The Corporate Practice of Medicine Doctrine
The Corporate Practice of Medicine doctrine, or CPOM, allows only licensed physicians to own and operate a medical practice. The underlying theory behind CPOM is that medical boards and regulating bodies do not want licensed providers to be influenced or incentivized by unlicensed individuals or organizations. Clearly, there could be a conflict of interest if providers are being incentivized to perform medical procedures on patients who may not otherwise need treatment.
Of course, the application and regulation of CPOM is ambiguous in the medical aesthetics industry. First, states apply it differently (“independent practice” states allow nurse practitioners to operate a medical practice without physician oversight). And second, there is no consensus across regulatory bodies on whether CPOM should even be applied to medical spas.
The laws can vary so much from state to state that we wrote an entire article on the complexities of CPOM and medspa regulation here. In sum, the way your state applies CPOM will greatly impact who can own a medical spa, which ties back to the existence of MSOs.
Work with a legal team who understand the acronyms
MSO, MSA, CPOM, NP… navigating the legalities of medspa ownership is a complex process that requires a legal team who specializes in the space. We’ve dedicated countless hours to understanding regulation and compliance in medical aesthetics and have served medical spa owners (and buyers) from start-up to sale. Contact us to learn more about our services or our membership program.